PIMCO's Recession Signal Is "Flashing Orange"

The recession warnings are growing louder.

Earlier this week we reported that according to JPMorgan's latest "real-time quant monitor", the risk of a recession has spiked to a no longer trivial 35%, the highest in series history (and up from 16% back in March)...

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... while the probability that the next presidential election will take place during a recession (i.e., odds in two years) has now surged to more than double that, or over 70%, virtually assuring that the US economy will be contracting in November 2020.

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Now, in a new research report by PIMCO, the world's largest bond manager with $1.7 trillion in AUM, warns that "while the expansion has been aging gracefully", the global economy is well past its peak growth phase, and the fund's recession models are "flashing orange."

In "Syncing Lower", PIMCO strategists Joachim Fels and Andrew Balls argue that while the global economy is past peak growth in the cycle, "central bank support continues to be reduced and political risk looms large across countries".

As a result, "the probability of a U.S. recession over the next 12 months has risen to about 30 percent recently and is thus higher than at any point in this nine-year-old expansion,” Fels and Balls write, although even with the threat of a recession now higher than any time in the past decade, "the models are flashing orange rather than red".

In the report, which is based on discussions at a forum this month of economists and portfolio managers to guide investments for the coming six to 12 months, the PIMCO duo lay out five key macro debates that will likely shape the cyclical and market outlook for 2019, and include:

  • Debate #1: How late is it in the cycle?
  • Debate #2: The end of U.S. economic exceptionalism?
  • Debate #3: Will inflation ever return?
  • Debate #4: The Fed pauses, then what?
  • Debate #5: the U.S. versus China: Truce or peace?

On Thursday, Pimco CIO Dan Ivascyn warned in a Bloomberg Radio interview Thursday that next year will be as rocky as this one.

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